Can proposal prep costs be considered if the Prime asked for a ROM vs. a RFP? If so, does FAR 31.205 have to be included in the contract to consider this cost impact?
ANSWER: To determine allowability, a cost must meet the five-part test of allowability in accordance with FAR 31.201-1(b). A cost is allowable when the Contracting Officer determines it is
3) Compliant with CAS or GAAP
4) Compliant with the terms of the contract
5) Compliant with any limitations set forth in FAR Subpart 31.2.
FAR 2.101 defines an unallowable cost as "any cost that, under the provisions of any pertinent law, regulation, or contract, cannot be included in prices, cost-reimbursements, or settlements under a Government contract to which it is allocable. FAR 31.201-6 discusses three ways that a cost can be determined unallowable; if prohibited by law, regulation or the contract terms and conditions, the cost is "expressly unallowable"; if determined unallowable by mutual agreement of the parties; and third, if the contracting officer determines a cost is unallowable by written decision, then that it's "designated as unallowable." It's important to note that failure to include any item of cost does not imply that it is either allowable or unallowable.
Generally speaking, proposal prep cost can be determined an allowable cost. For instance, if the nature of the contract work or how the contract is structured drives a high volume of contract modifications or task/delivery orders, etc., then that could lead to substantial proposal prep cost for the contractor. In such instances, an advance agreement with the contractor in accordance with FAR 31.109 could be established to clearly delineate when these costs will or will not be paid under a contract or a group of contracts. If there is an advance agreement in place which addresses proposal prep costs, then the agreement governs how these costs will be paid. If one is not in place, it might be a good idea to establish one if these costs are significant and there is a likelihood of these costs being incurred on a recurring basis.
FAR 31.205-18 also has some helpful guidance in relation to your question. In accordance with FAR 31.205-18, "Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract." These cost are typically allocated through an indirect G&A expense rate, but the Contracting Officer can approve a different basis. FAR 31.205-18 also addresses allowability for B&P costs: "Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable."
The key takeaway here is the importance of ensuring that you are not paying for these costs twice; once as an indirect and again as a direct cost (by including these costs in the contract modification when they've already been paid for through a G&A rate). Consider requesting DCMA to review these costs to determine if they are already being paid for through the contractor's G&A rate. If their G&A rate does not adequately compensate the contractor for their B&P cost on this particular contract, and the cost is otherwise allowable, then consider whether or not they should be paid as a direct cost to the contract. You should be able to find the answer by reading the contract to see what it says (if anything) about B&P costs; By looking at how these costs have been treated on previous contract mods; And finally by reviewing advance agreements the Government has with the company if any exists. If this is the first time B&P cost for a ROM has been included in their proposal (and you've determined that this cost is not compensated through their G&A rate after consulting with DCMA), consider establishing an advance agreement for future contract actions particularly if these costs are significant and will be incurred on a recurring basis. Finally, I strongly recommend, discussing this further with your Administrative Contracting Officer and Cost Analyst if there is one supporting your procurement office.
By the way, only FAR clauses are included in the contract, so you do not want to put FAR 31.205 in the contract.